Siegel On Why Stocks Could Rise 30%

Siegel Stocks 30%, Siegel On Why Stocks Could Rise 30%

As I stated above, investors always bid up prices as earnings increase. With earnings expected to double over the next two years, and if we assume Siegel is correct in his 30% advance, the picture changes. Instead of valuations declining, the increase in price keeps valuations near 30x earnings. (Note: While Siegel discussed a 30% increase over 12 months, I have spread it out over two years.)

Siegel Stocks 30%, Siegel On Why Stocks Could Rise 30%

If Siegel is correct, a 30% advance will further exacerbate already extreme technical deviations.

 

Technical Extremes

“This time is different” is often the phrase most heard near market peaks. The reason is that it takes time to change psychology embedded during the previous “bear market.” However, once the “fear” is displaced by “greed,” the ensuing “bull market” leads investors to take on increasing levels of risk. Unfortunately, the reality is that eventually, the price reverts to reflect underlying economic and fundamental realities.

What causes that reversion is always unknown. However, it is generally a credit-related event that leads to a rush to protect capital. As I explained in “Fully Invested Bears:”

“Such is the consequence of the Federal Reserve’s ongoing interventions. Portfolio managers must chase performance despite concerns of potential capital loss. In other words, we are all ‘fully invested bears.’ We are all quite aware this will eventually end badly. However, in the short-term, no one is willing to take the risk of being grossly underexposed to Central Bank interventions.”

With the markets significantly deviated from long-term means, the following “reversion” will likely be a reasonably brutal event. As shown below, the market is currently trading nearly 20% above its one-year moving average. Such has only occurred a few times historically and has preceded corrections and outright bear markets.

Siegel Stocks 30%, Siegel On Why Stocks Could Rise 30%

The market is also trading more than 25% above its 24-month (2-year) moving average. Such has previously only occurred a couple of times previously (1987 and 1999.)

Siegel Stocks 30%, Siegel On Why Stocks Could Rise 30%

From a technical perspective, such is simply a reflection of current market psychology. That psychology is exceptionally bullish and very lopsided in terms of equity risk allocations. With the market “priced for perfection,” such leaves investors at risk of disappointment.

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